Patient Protection and Affordable Care Act (ACA)
This article lists some of the major provisions of the Patient Protection and Affordable Care Act, otherwise known as the ACA or Obamacare, especially in regard to business. Needless to say, there are many omissions that cannot be covered here, since the ACA is thousands of pages long.
Health Care Coverage Credit and Tax
The main purpose of the ACA is to make medical insurance affordable to everyone. It does so by requiring everyone to have health insurance that meets minimum requirements. So that everyone can afford it, a health care credit is provided for those who earn between 100% and 400% of the federal poverty level (FPL, adjusted annually for inflation), which depends on the size of the household, with the amount of the credit increasing with lower incomes. In 2013, the lower income limit was equal to $45,960 for a single person up to $94,200 for a family of 4. The FPL for families depends on the number of people in the family and the household income, equal to the total income earned by all members of the family who must file tax returns. The ACA also expanded Medicaid for those who earned less than 133% of the FPL. However, a 2013 decision by the Supreme Court allowed the states to choose whether they wanted to expand Medicaid or not, so many states, headed by Republican governors, opted not to expand Medicaid.
New Taxes on Individuals
Beginning in 2013, the AGI floor for deducting medical and dental expenses is increased from 7.5% to 10% for those under 65. Those older than 65 can continue to use a 7.5% floor until 2016, when it will rise to 10% for everyone. Moreover, if the alternative minimum tax applies, then the 10% AGI floor applies to everyone.
Under the new tax package passed by the Republicans at the end of 2017, known as the Tax Cuts and Jobs Act, the medical expense deduction threshold has been reduced to 7.5% of AGI, but only for 2017 and 2018. After 2018, the deduction returns to the 10% of AGI threshold. However, the Taxpayer Certainty and Disaster Relief Tax Act of 2019 reverted the medical expense deduction from 10% to 7.5% of AGI, which it had been for many years, and can be applied to tax years 2018, 2019, and 2020.
The Tax Cuts and Jobs Act eliminated the individual mandate, but only applies for tax years 2019 and afterward.
HR 1865 has repealed the so-called Cadillac tax on high-cost health benefits, the 2.3% excise tax on medical devices and the excise tax on health insurance. All of these measures had been repeatedly delayed, so they were never enacted, but they are now all repealed permanently.
There is a new mandate to purchase health insurance, beginning in 2014. Those who do not will be assessed an Individual Mandate Tax, called the Shared Responsibility Payment penalty, which is the greater of $95 or 1% of modified adjusted gross income (MAGI) minus the taxpayer's filing threshold, plus $47.50 for every child younger than 18, increasing to the greater of $325 or 2% of MAGI in 2015, then increasing to the greater of $695 or 2.5% of MAGI in 2016, with families paying 3 times this minimum. The penalty cannot exceed the cost of the lowest cost Bronze plan, which in 2018 was $2085. The individual mandate tax applies to all individuals not covered by employer-provided health insurance, including the self-employed. MAGI, as defined under the ACA, = AGI plus:
- nontaxable Social Security benefits,
- tax-exempt interest, and
- excluded foreign earned income + deducted housing expenses. IRC §36B(d)(2)(B)
If the individual mandate tax penalty is not paid, then the IRS will simply withhold those amounts from any future refunds. The IRS is not permitted to charge interest or any additional penalties nor can it seek to collect the penalty by lien or levy. Proof that the tax was paid will be provided by the insurance companies, who will send 1099 forms to the IRS. If the employer provided the insurance, then the value will be reported on Form W-2, Wage and Tax Statement.
There is also a new Medicare payroll tax – the Additional Medicare Tax – of 0.9% on earned income for upper income taxpayers. This is additional to the 2.9% Medicare tax that is imposed on lower incomes. However, this new tax is paid only by the individual — not by the employer.
There is also a new 3.8% tax – the Net Investment Income Tax – on unearned income, which is investment income, such as dividends, interest, rents and royalties, capital gains, and passive income from partnerships, S corporations, and trusts. The income thresholds for this tax are the same as for the 0.9% Medicare payroll tax.
|Filing status||Threshold Amount|
|Single, Head of Household||$200,000|
|Married Filing Jointly, |
Qualifying Surviving Spouse with Dependent Child
|Married Filing Separately||$125,000|
Employer Mandate Tax Penalty
Since 2015, employers (aka large employers) with at least 50 employees — those who work at least 30 hours per week — are required to provide health insurance to their employees or pay a tax penalty — called the employer shared responsibility payment — of $2000 per employee or $3000 per employee if the health insurance that is being offered is unaffordable to the employees or inadequate and at least 1 of those employees receives, or is allowed to receive, a tax premium credit to purchase insurance on an ACA exchange. The corresponding figures for 2016 were $2160 and $3240. In calculating the penalty, the 1st30 employees are not counted. (This provision was set to begin in 2014, but it has been delayed by 1 year.) To be affordable, the employee's cost cannot exceed 9.5% of the employee's income or the plan's share of costs may not be less than 60%. Employers also must report the health insurance being provided on Form W-2s.
Health Care Tax Credit
To help small businesses to provide health insurance for its employees, the ACA includes a new health care tax credit. The credit is nonrefundable, meaning that the benefit cannot exceed the business's tax liability, but it can be applied to the alternative minimum tax. The maximum credit of 50% of the lower of the cost of premiums or the average cost in the state can be claimed by businesses with a maximum of 10 employees with average salaries of less than an annually adjusted wage limit:
Owners are not included in the employee count or in the averaging of salaries. The credit starts to phase out as the number of employees increases or the average salary increases, phasing out completely when there are more than 25 employees or their average wage exceeds $25,000 greater than the annual wage limit for the full credit. So, for 2015, the complete phaseout occurs when average employee wages reach $50,800 (= $25,800 + $25,000). The credit can only be claimed if the employer pays at least 50% of the premiums for the employees.
Unfortunately for the business owner, however, if the credit is claimed, then the premiums cannot be deducted as an expense, greatly lessening its value. Calculating the credit is done on Form 8941, Credit for Small Employer Health Insurance Premiums (Instructions: Inst 8941). Resource: Small Business Health Care Tax Credit Questions and Answers: Determining FTEs and Average Annual Wages | Internal Revenue Service
Cadillac Health Plans
Employer-provided health insurance is one of the few fringe benefits that is completely tax-free to the employee, including free of employment taxes. Consequently, highly compensated or unionized employees seek, and often get, so-called Cadillac health plans, where the employee does not have to pay a deductible or copayment, thus, making healthcare a free service to the employee. As with anything provided for free, people tend to consume more than they actually need or select health services without considering their cost. Although the employee does not have to pay for the healthcare, the general consumption of healthcare, especially without regard to cost, increases healthcare prices for everyone by increasing the demand for healthcare. And since the employee does not consider the cost, it is only natural for healthcare providers to charge more, to earn a higher profit.
To discourage the use of Cadillac health plans, the ACA imposes an excise tax on these plans for which there is no exemption even for small employers. Beginning in 2018, the tax is imposed on the excess benefit, adjusted for inflation, on single coverage whose cost exceeds $10,200 or family coverage costing more than $27,500. There is an exemption, however, for high risk employees and retired workers not yet eligible for Medicare.
In 2016, the Cadillac health plan excise tax has been delayed until 2022. However, since this excise tax is opposed by both big business and unions, it will probably be killed permanently after the 2016 elections, so I doubt that it will ever be collected.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (SECURE Act) has repealed the Cadillac tax.